Oil May Slip Towards Mid-$80s as Europe Weighs: Survey

Sri Jegarajah|Reporter, CNBC Asia Pacific

Monday, 28 May 2012 | 10:44 PM ET

SHARES

Oil prices will likely extend losses for a fifth-straight week as fears about a Greek exit from the euro zone and Spain's banking system continue to trigger outflows from riskier assets including commodities and into the relative safety of the U.S. dollar, according to CNBC's weekly survey of oil market sentiment.

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Many traders and strategists polled forecast U.S. crude futures could make a sustained breach below $90 a barrel and test $85 or possibly $84 a barrel this week. Much will depend on the U.S. labor report on Friday. A solid reading may help establish a floor in the oil market while a poor number could compound the woes of the global economy.

"Financial risks such as a stronger U.S. dollar and a lower S&P 500 are set to continue to contaminate the oil price, in our view," Deutsche Bank analysts led by Michael Lewis said in a report. "In WTI (West Texas Intermediate, the U.S. crude futures contract) physical fundamentals are also weakening with crude oil inventories on the rise."

The poll showed consensus opinion was overwhelmingly bearish: Ten out of the eleven respondents in the sample group expect prices to fall this week. Phil Flynn of PFGBest, the survey's sole respondent with a bull call, expected a rebound based on technical indicators which suggested markets were oversold and fears that tensions would resurface.

Talks last week between Tehran and world powers did not result in any agreement, with negotiations continuing next month at another meeting in Moscow, Reuters reported. Meanwhile, the U.N.'s International Atomic Energy Agency found uranium particles refined to a higher-than-expected level than what Iran has disclosed.

"Right now, I continue to expect a general 'risk-off' or 'short the world' attitude," said Tom Weber at Portfolio Managers, Inc. Commodity Futures & Options. "However, I won't underestimate the ability of the political elite to save the day with pronouncements and promises of solidarity. I believe traders have adapted to a 'show me' approach to global markets. The market is going to call the bluff of central bankers regarding QE."

'Insulin' For Markets?

Europe will continue to provide the negative overlay, with the focus on Greece, Spain and Italy. Kirk Howell, Chief Operating Officer of SunGard's Kiodex, said $90 a barrel was a key psychological level for U.S. crude futures which "will likely be broken this week given the confluence of a slowing Chinese economy and potentially collapsing European economies."

HSBC flash PMI for Chinashowed a seventh straight decline to 48.7 late last week and Spain had to move to bail out Bankia only 10 months after its IPO, Howell noted. "This week we would have an eye to Italian bond auctions and May U.S. jobs on Friday. The wildcard is, as usual, what will central banks do? A significant response from the ECB (European Central Bank) and the Chinese government could provide another shot of insulin to the broad market."

Technical strategists are equally negative. "We are looking for a move towards $89.15 (WTI crude) and $104.50/105.00 (Brent crude)," said Dhiren Sarin, Barclays Capital's Chief Technical Strategist for Asia-Pacific. "While we are negative, we don't think the pace of the move is going to be aggressive; the U.S. dollar has already had a very strong bull run and the risk is that bullish USD and bearish oil moves become more choppy."

Mike Baghdady at Training Traders said he established a short position on U.S. crude futures when the July contract broke below $101.83. "It has begun a extended downward move, a bear market was confirmed on a trade below $93.43 and we are looking toward the $85 level for some support or profit taking."

Sandy Jadeja, Chief Technical Analyst at CityIndex is even more negative and says Nymex crude has potential for a move to as a low as $84.25.

Does mid-$80 a barrel oil represent the floor in the market? The price correction in crude oil is "halfway behind us," Dominic Schnider, Head of Commodity Research at UBS Wealth Management, told CNBC Asia's "Squawk Box" on Tuesday, but there is still another $10/barrel to go.

"Crude oil inventories are building up across the globe on excess supply by more than 0.5 million barrels of oil a day," he explained. "To balance the market - motivate additional demand or trigger a reduction in OPEC production activity - a price dip below $100/barrel is still required, in our view."

Correction: An earlier version of the article incorrectly stated that consensus opinion was "overwhelmingly bullish" rather than "overwhelmingly bearish."